• Maintain SELL with new TP of MYR0.50 from MYR0.43, 28% downside. FY20 results missed expectations at 92% and 79% of our and consensus forecasts. The company declared total DPS of 2.5 sen for FY20, which translates to a lower dividend payout ratio of 32% (FY19: 44%). We think that the market is overly optimistic on potential earnings from the LRT3 JV project, in contrast to our more cautious stance.

• Missed expectations. George Kent’s 4QFY20 (Jan) core earnings of MYR6.8m (-34% QoQ, -73% YoY) were lower than our earlier earnings forecast of MYR10.4m, bringing FY20 core earnings to MYR41.6m (-52.6% YoY). No dividends were declared.

• FY19 net profit fell 53% YoY on the back of shrinking construction orderbook, narrowing margins and minimal contribution from its LRT 3 JV project. The seasonally stronger 4Q was absent in FY20, with 4QFY20 EBIT only contributing 18% to full-year EBIT (4Q for FY17-FY19 contributed an average of 41% of full-year EBIT). The engineering segment recorded revenue of MYR52m in 4QFY20 (+31% QoQ, -35% YoY) on the back of higher construction activities as compared to the previous quarter, while the water meter segment weakened by 8% QoQ (-8% YoY). Construction EBIT margin more than halved YoY in 4QFY20 to 23.4% (FY19: 54%), while the water meter manufacturing segment saw improvement of 3.6ppts to 19%.

• We expect core earnings to grow 10% and 13% YoY during FY21F-FY22F from a low base, premised on our house view for the COVID-19 pandemic to be broadly contained in 1H20, with activities expected to gradually recover thereafter. In our opinion, growth could be driven by the resumption of contribution from the LRT3 JV project and additional booking of 80,000 and 100,000 smart water meter connections for FY21F-FY22F (from 140,000 connections). However, we expect growth to be dampened by the smaller outstanding construction orders and weaker expectation for its water meter manufacturing segment for FY21F.

• New MYR0.50 TP. We cut FY21F-22F earnings by 16% and 6% and introduce FY23F core earnings of MYR42m after reflecting adjustments in progress billing. We maintain FY21F-23F orderbook replenishment assumption of MYR150m. The stock lacks visible re-rating catalysts given the unfavourable ripple effect caused by the recent oil price collapse, leading to greater uncertainty on the Government’s ability to fund infrastructure spending and unclear policy imperatives. We roll forward our base year to FY22F to better capture the anticipated economic recovery and ascribe a target P/E of 5.5x (from 4.5x, -1SD from its 5-year mean), which is also the average forward P/E prior to its involvement in the rail infrastructure project. We think its chances of clinching large infrastructure projects remain slim.

• Key upside risks include stability in the macro economy, positive outcome for water reform, higher-than-expected earnings contribution from the LRT3 project and further wins in water-related infrastructure construction.

Source: RHB Securities Research - 4 May 2020